Friday, October 10, 2008

Economic Crisis

If you're like me, you are watching the stock market and realizing that a bunch of wealth that you had on paper has dried up in the past month. With the market plummeting, it is easy for widespread panic to set in.

I'm not a financial advisor, but I have been following the markets pretty closely ever since a college internship convinced me that I didn't want to be a stockbroker. Calling people at home and asking them if they wanted to send their money to a stranger to manage wasn't for me. In the process during, and since, the internship, though, I've learned a few valuable lessons.

1. It is all about when you need the money. If you have money in the stock market that you need next year for college tuition, or for a house down payment, the damage may be done. You should call a fee-based financial advisor. If the money you have in the market won't be needed for 5, 10, or 15 years, you can sit back and determine if this is a blue light special on stocks.
2. Markets usually move in the opposition direction of emotion. Several contrarian indicators suggest that the best historical buying opportunities have been when people are devastated and depressed about the market. The same indicators suggest that the market usually reaches its peaks and peters out when everyone thinks that the market can only go up, up, up.
3. Pro's can't pick a bottom. Neither can you or I. Dollar-cost-averaging into a market like this, or any market, is the smartest approach. Invest $50, $250, $1,000 each month, whatever you can afford to invest. You may not pick the bottom of the market, but you'll buy more shares at the lower prices.
4. Don't sell at the bottom. I don't know if this is the bottom. But if you don't have to, don't panic and cash out. That would be stupid.
5. Live frugally. Times like this remind me that having a surplus in your checking account after the bills are paid, be it large or small, is the best way to hedge against financial downturns. Over time, the surest way to become financially independent is to live below your means. It helps to win in the stock market, but is not required.

Good luck. Hang in there.

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